Mumbai: National industry director (consumer markets) Ramesh Srinivas, at KPMG Services Advisory Pvt. Ltd, on Tuesday released his report titled “Indian Retail. Time to change lanes”, which looks at India’s retail industry’s journey so far. “At the beginning, the market seemed ‘picture perfect’ with the most attractive stops still unexploited and under-penetrated,” Srinivas said in a joint interview with Neil Austin, KPMG’s global head of markets. “All retailers believe that the current uncertainty is only near term and is likely to persist for 12-18 months, (and) there exists certain degree of scepticism in achieving targets,” he said. Austin said that if the situation worsens in the next six months to an year, mergers and acquisitions in the sector will likely accelerate. Edited excerpts.

Can you sum up the key findings of the report?

Scepticism exists: Ramesh Srinivas

Srinivas:The current slowdown in retail is expected to last another 12-18 months. Falling footfalls and poor conversion ratio has led to a decline in sales growth to 11% in December 2008, compared to 35% in December 2007. There is an increased focus on value retail in the coming months and a shift away from lifestyle goods. The focus will be more towards food retailing and FMCG (fast-moving consumer goods) products. Retailers will mainly focus on cost reduction by closing unprofitable stores and rationalizing capital expenditure. Retailers will focus on tier II and tier III cities and will focus more on private labels where margins are higher. Most of the retailers are focusing on increasing investments in shortening supply chains. Frequent discount offers will liquidate slow-moving goods and reduce inventory. However, for retailers looking at expansion, this is a good time because real estate rates have softened. With falling rentals, churn in mall occupancy is likely to increase.

Where did Indian retailers go wrong?

Srinivas:Retail is a new sector in the country and many of them are still learning from their mistakes. Definitely consumer spend was over estimated. Moreover, most of the retailers expanded not focusing on the best locations but went ahead depending on the availability of stores. Overcrowding of retail outlets in certain areas has also led to cannibalization.

Scepticism exists: Neil Austin

Many blame the unrealistic real estate prices as the cause of the downfall of retail. What is your view?

Srinivas:Certainly high real estate prices impacted the profitability of retailers as retail operates on wafer-thin margins. In many cases, the rents paid by the retailers were much higher than the sales of the store. Real estate prices have masked the overall profitability of retailers.

What are the segments of retail business models that can do well?

Srinivas:The concept of hypermarkets and supermarkets will work. However, supermarkets as a concept is difficult as they compete directly with the kirana (neighbourhood grocery) stores. The cost of overheads of a kirana store is extremely low, which a organized retailer can never hope to match. However, supermarkets will grow in certain locations and certain categories.

Among all the Indian retailers, can you name the business models and the companies that can withstand the current slowdown and are doing the right things?

Srinivas:I can’t name any particular companies. However, larger retailers will shut fewer stores compared to the smaller ones, as getting access to working capital is a big concern in the present scenario.

Some retailers like Bharti Retail and Tata’s Trent did not ramp up like other retailers. Do you think they are better placed than the rest?

Srinivas: They have a different approach, as their strategy is to learn first and then expand. In the present situation they were proved right.

Austin: The retailers who will take immediate strategic measures will be the dark horses. Be it store rationalization, change of supply chain, consolidation of operations, improvement of IT infrastructure, retailers need to think quick to protect their margins and become tougher. Unlike earlier, attrition in retail has come down as there is less scope for shifting jobs.

Is the Indian retail sector different from other emerging markets?

Austin:Yes, India is different from many other emerging markets such as China and Africa. China has formats replicating US (formats). The look of a Carrefour store in China exactly the same as that in (the) US. However in India just taking a concept and replicating (it) won’t work as the country is still in a traditional mode. Economics in India is very different and that is one of the reasons why many foreign tie-ups are not working in India. Successful retailers are those who borrow ideas and adapt it fast.

Can you elaborate?

Earlier discretionary spends in developed markets such as the US and UK were very high. People used to change television sets within a year or two just because the new set may have some added features. But now even in the Western countries people are looking for value. Although food categories are growing due to downtrading and value retailers are doing well but non-food retailing like consumer durables, home furnishing, apparel and others are adversely impacted, mainly due to the fear of job loss. Another reason for the food category growing is because people are not eating out much.

Do you see more mall outlet closures and pink slips in the sector? When will consolidation start in the sector?

Austin:If the present situation continues for next 4-6 months there will be more pink slips, though not on a very large scale. There is a crisis of a lack of working capital. If the situation worsens in the next six months to a year, consolidation will be triggered. Mergers and acquisitions will happen while some retailers will look at divesting stake.

What is the long-term outlook for India’s retail sector?

Austin:(The) attractiveness of India’s demographic and economic environment will continue to add momentum. The prospects for retail expansion are still very attractive and this period of uncertainty is seen as an important consolidation imperative for the industry.